Mutual Fund Fraud

Mutual fund fraud occurs when brokers perform a variety of unethical actions, usually to increase their fees or commissions. They may urge investors to purchase unsuitable class shares without explaining important details such as the associated fees, costs, and benefits. They may also be accepting commissions from mutual fund companies but not disclosing this conflict of interest to their customers.

When is the best time to act?:

Mutual fund fraud is a serious charge that carries heavy penalties in the event of a conviction. If a broker or brokerage learns that they are under investigation for mutual fund fraud, they should contact a criminal defense attorney immediately

State Penalties for Mutual Fund Fraud:

The Martin Act is New York’s state securities law. It empowers the Attorney General to conduct civil and criminal investigations into mutual fund fraud. Unlike traditional fraud statutes, the Martin Act doesn’t need proof of intent to defraud to convict someone of a misdemeanor. Penalties of a misdemeanor consist of a fine totaling no more than $500 or up to a year in prison, or both. If intent to deceive is proven, accused persons are guilty of a class E felony, which can result in a prison term of one to four years.
Those found guilty of mutual fund fraud can also be investigated by FINRA and have their registration suspended or revoked.

High profile/government cases:

In April 2010 mutual fund manager Morgan Keegan & Co. was charged with fraud for allegedly inflating the value and glossing over the risk of securities backed by subprime mortgages.
Securities Exchange Commission officials claimed that fund manager James Kelso manipulated the prices of subpar investments to make them more appealing to potential investors. To conceal the losses hitting funds backed by subprime mortgage investments, Kelso persuaded the accounting department to accept over 200 price ‘adjustments’ during the first seven months of 2007. The SEC estimated that the scheme cost investors nearly $1 billion in losses.
FINRA filed a separate complaint claiming that Morgan Keegan deceived customers about the risks that investing in the bond funds entailed.

Types of mutual fund fraud crimes/charges:

At the state (Martin Act) level, deliberate securities fraud is a Class E felony, while unintentional securities fraud is a misdemeanor. Federally, mutual fund fraud is regarded as a white-collar crime and prosecuted more vigorously, which is one of the reasons why it isn’t prosecuted as often at the state level.

Related Crimes:

Grand Larceny in the First Degree, Money Laundering in the First Degree, and 30 counts of Falsifying Business Records in the First Degree.

Federal Level Penalties and Punishment:

The Securities and Exchange Commission normally takes the lead in prosecuting mutual fund fraud, which is considered a federal crime. Penalties upon conviction include:
● Fines that can range from thousands to millions of dollars
● Incarceration (usually five years per offense)
Additional penalties include restitution and probation, the latter of which usually applies if there was only a single act of fraud that did not result in financial loss.

Successful Defenses:

Mental disease / defect and proven lack of intent to defraud are both viable defenses in mutual fund fraud proceedings. Even if neither situation applies, those accused of this type of investment fraud should work closely with their attorney to strengthen their case.

Difference between New York securities fraud statutes and Federal statute:

Claims under New York’s Martin Act are different from fraud claims made under the federal securities laws. The Martin Act has no private right of action that the federal statutes support, and the punishments for violation are much less severe than they are at the federal level.